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How I’m Protecting My Investments From What Could Go Wrong Next Year
The big questions looming over 2025 include whether the Federal Reserve has successfully tamed inflation and where interest rates will head. Unfortunately, no one can accurately predict the future in this regard, and anyone who claims to know is likely overselling their expertise. That said, I’m not letting uncertainty stop me from making real estate investments. In fact, I’ve set up a strategy to protect my portfolio against the potential risks of inflation and prolonged high interest rates.
Investment Mix: Equity and High-Interest Debt
During periods of inflation, fixed low-interest debt investments, like bonds, lose money. For example, in 2022, inflation hit 9.1%, while Treasury bonds offered just 2% interest, meaning bondholders lost 7.1%—or had to sell at a steep loss.
Equity investments in real estate and stocks, on the other hand, have historically done well during inflationary times. Companies can raise prices, and property owners can increase rents to keep pace with inflation.
My portfolio is primarily weighted toward equity investments in real estate and stocks, but I also hold some high-interest debt investments secured by real property. Even if inflation spikes again, which could diminish those interest returns, I believe I’ll still come out ahead.
The real challenge during inflation is how it affects financing and exit cap rates in real estate.
Long-Term, Fixed-Interest Financing
For several years now, my Co-Investing Club has been cautious about short-term bridge debt and floating interest rates. None of us can predict exactly how long high interest rates will persist, especially if inflation surges again under certain political conditions.
When reviewing new passive real estate investments, we prioritize long-term fixed-interest financing or strategies that provide some protection, like rate caps, rate swaps, or ample time before the debt expires. This gives us flexibility to sell or refinance in a favorable market.
Strong Cash Flow
While there are benefits to investing for both cash flow and appreciation, I lean heavily toward cash flow. Why? Because investments that generate steady cash flow can weather buyer’s markets without forcing a rushed exit.
The latest investment our club reviewed offers a solid 8.6% cash flow in the first year, climbing to 12.7% once stabilized. This consistent income stream provides a buffer against market volatility, allowing us to hold onto properties until conditions are right for a sale.
In contrast, investments with minimal cash flow can easily become problematic during down markets, forcing investors to sell prematurely at a loss.
Investments That Don’t Depend on Interest Rates
One of the main reasons I’ve shifted my focus is to avoid hanging on every word from the Federal Reserve. For instance, our recent investment is a cash-flowing deal that doesn’t rely on fluctuating interest rates. Even if rates remain high, the investment will continue to produce solid returns until the right time comes to refinance or sell.
Additionally, we recently invested in a land-flipping fund that doesn’t require low interest rates to succeed. The fund has consistently delivered high returns and pays 16% in distributions. Even if interest rates stay elevated, these kinds of investments can thrive.
Opportunistic Distressed Deals
While risk mitigation is always top of mind, I also see opportunities in distressed properties. Last month, our club acquired a property at a huge discount from a hedge fund struggling with floating-rate debt. This distressed deal already offers 8% in distributions, with expectations of 20% annualized returns over three years.
If interest rates remain high, we can hold onto this investment longer, waiting for a better market to sell.
Diversification
Diversification is the backbone of my investment strategy. Rather than focusing on the next “hot market,” I prefer to invest passively in various property types across different regions in the U.S.
I’ve learned that trying to time the market is a losing game. Instead, I practice dollar-cost averaging, investing $5,000 each month in a new group investment. This strategy ensures that I’m continually building my portfolio, regardless of short-term market shifts.
Don’t Be Clever—Think of the Long Term
Diversification might not sound flashy, but it’s a time-tested strategy that keeps me in the game. By spreading my investments across different timelines, markets, property types, and operators, I’m well-positioned to navigate downturns. While I might experience occasional losses, my overall portfolio will continue to grow, ensuring that I can keep investing while others struggle to recover.
This is how I’m preparing for 2025, with a focus on protecting my investments while still pursuing new opportunities.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
How I’m Protecting My Investments From What Could Go Wrong Next Year
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“